Understanding Minimum Corporate Income Tax (MCIT)

MCIT, as defined in the National Internal Revenue Code (NIRC) of the Philippines, is a system that requires corporations to pay a minimum income tax, regardless of their actual net income. The MCIT is in place to prevent tax evasion or avoidance strategies that some companies may employ to reduce their tax liabilities.

To what corporations is MCIT applicable?

It is applicable to domestic and resident foreign corporations which are subject to normal corporate income tax.

What are the instances when the MCIT is imposed?

The MCIT shall be imposed whenever a domestic corporation has:

1. Zero or negative taxable income; or
2. Whenever the amount of MCIT is greater than the NCIT tax rate of 30% on taxable income from the corporation.

Is MCIT a tax on capital?

No. The MCIT is imposed on gross income which is arrived at by deducting the capital spent by a corporation in the sale of its goods, i.e., the cost of goods and other direct expenses from gross sales. Clearly, the capital is not being taxed[1].

How is MCIT computed?

MCIT is computed at 2% of the gross income of the corporation as of the end of the taxable year, beginning on the fourth taxable year immediately following the year in which such corporation commenced its business operations.

Note: MCIT shall likewise apply to the quarterly corporate income tax but the final comparison between the NCIT due and the MCIT shall be made at the end of the taxable year taking into consideration quarterly tax payment made.[2] The year in which a corporation commenced its business operations is the year when the corporation registers with the BIR and not when the corporation started commercial operations. [3]

What is gross income for MCIT purposes?

Gross income shall mean gross sales less sales returns, discounts and allowances and cost of goods sold. In case the taxpayer is engaged in the sale of service, gross income means gross receipts less gross returns, allowances, discounts and cost of services.

Note: If apart from deriving income from these core business activities, there are other which are subject to the MCIT. This means that gross income will also include all items of gross income enumerated under Section 32, par. (A) of the NIRC, except income exempt from income tax and income subject to final withholding tax.

What is the concept of carry-forward of excess MCIT?

Any excess of MCIT over NCIT may be carried forward on an annual basis and be credited against the NCIT for the three immediately succeeding years.

What are the rules on the carry forward of excess MCIT?

The following are the rules on the carry-forward of excess MCIT:

1. The excess of MCIT over the NCIT can be carried forward on an annual and quarterly basis;
2. it can be credited against the NCIT due in the next three (3) immediately succeeding taxable years;
3. Any excess no credited in the next three (3) years shall be forfeited;
4. Carry forward (annually or quarterly) is possible only if NCIT is greater than MCIT;
5. The maximum amount that can be credited is up to the amount of the NCIT; and
6. The excess MCIT cannot be claimed as a credit against the MCIT itself or against any other losses.

What are the instances when the imposition of MCIT may be suspended?

The Secretary of Finance may suspend the imposition of the MCIT when the corporation suffers substantial losses due to:

1. Prolonged labor dispute – losses arising from a strike by the employees more than 6 months within a taxable period causing temporary shutdown business operations;
2. Force Majeure – cause due to an irresistible force as by “act of god” like war and insurgency;
3. Legitimate business reverses – include substantial losses sustained due to fire, robbery, theft, or embezzlement, or for other economic reasons as determined by the Secretary of Finance. [4]

What are the entities exempt from the imposition of the MCIT?

The MCIT shall not be imposed upon and of the following:

1. Domestic proprietary educational institutions;
2. Domestic non-profit hospital;

Note: This is subject to the Predominance Theory. Proprietary education institutions and non-profit hospitals enjoy the privilege of being taxed at the rate of 10% on net income, provided if the gross income from unrelated trade, business, or activity exceeds fifty (50%) of gross income from all sources, the domestic proprietary educational institution or hospitals shall be subject to 30% NCIT, and thus also to MCIT.

1. Domestic depository banks under the expanded foreign currency deposit system-subject to final income tax of ten percent (10%) of their taxable income;
2. Resident foreign international carrier-subject to two and one-half percent of the Gross Philippine Billings;
3. Resident foreign regional operating headquarters-subject to final income tax at ten percent (10%) of such income;
4. Resident offshore banking units-subject to final income tax at ten percent (10%) of their taxable income;
5. Firms enjoying special income tax rate under the PEZA law, Bases Conversion and Development Act and those enjoying income tax holiday incentives;
6. Nonresident foreign corporations; and
7. Real Estate Investment Trust.

Note: The entities enumerated above are exempt from MCIT because they are not subject to NCIT.

Source:

The National Internal Revenue Code, as amended by TRAIN Law

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[1] Chamber of Real Estate and Builder’s Associations, Inc. v. Romulo, 614 SCA 605, 628, G.R. No. 160756. March 9, 2010

[2] R.R. No. 12-2007

[3] R.M.C. No. 4-2003

[4] Memorandum No. 6-2002